What Is Bitcoin (BTC) & How Does Bitcoin Work?

Created by Shingo Lavine, Modified on Mon, 13 Feb, 2023 at 8:46 PM by Shingo Lavine




Link to Ethos Cryptopedia

What is Bitcoin?

Bitcoin is the world’s first peer-to-peer digital currency, or cryptocurrency. Released in 2009 by the anonymous Satoshi Nakamoto, Bitcoin is the most significant application of blockchain technology today–it currently boasts a market capitalization of 112 Billion USD. In its documentation, Satoshi Nakamoto laid out its implementation: a secure, global, immutable public ledger as a record of every transaction on the network (the blockchain) and an incentive for consumers to contribute their computing power to the blockchain network (Bitcoin). The fundamental ideas behind Bitcoin came at a time when peer-to-peer networking and cloud computing were redefining the technology spaces of networking, data storage and management. At the time, however, the security and maintenance of such networks were primarily handled by large corporations looking to make a profit. Bitcoin’s documentation, on an abstract level, was a proposal to move the security and maintenance work to external, anonymous crowd contributors, bringing about a decentralized and democratic shift in these industries.

How does Bitcoin work?

A network is fundamentally a system with multiple nodes (users) and connections (transactions) between these nodes. As a network, the Bitcoin Network’s purpose is to enable users to send tokens to one another (bitcoins). The primary issues with transactions in general are those of security and accountability, both of which require solutions to prevent fraud. Imagine making a financial transaction over the internet in which you send your rent to your landlord. You would hope for two things: that the money does not get intercepted by a third party along the way, and that your transaction is recorded in a ledger somewhere should the payment not go through. The blockchain’s approach to solving these issues is what makes it a truly revolutionary technological innovation. Bitcoin requires the help of miners: individuals or organizations that contribute their computational energy to encrypt the information of these transactions. Miners will use large rigs of hardware to solve cryptographic puzzles on a Bitcoin-specific computer program that hashes the information of each transaction on the network. When a transaction is encrypted by a miner, it is added as a new block to a connected chain of blocks. This acts as a visible, immutable public ledger–hence the name blockchain. In exchange for all of this computational effort, if the miner’s creation of the new block is deemed valid by the network (via consensus), the miner is rewarded with a newly created Bitcoin. The miner can then use this coin however he/she chooses.

Does Bitcoin Carry Value?

Simple answer: Bitcoins have no inherent value. If that’s the case, then why would users make Bitcoin transactions over multiple blockchain networks every day? The reality of the matter is that even if your native country’s government uses a fiat currency backed by precious metals such as silver and gold (called the Bretton-Woods System, which was terminated by the “Nixon Shock” in 1971), the paper currency in itself also has no inherent value. Paper currency, in absolute terms, is worth the cost of the cotton-linen material and printer ink. Similarly, Bitcoins are only worth some strings of hexadecimal digits. The point is that goods in a free market will be priced to reflect what the market deems those goods to be worth. If consumers strongly value a certain type of financial asset, that value will be discounted into the price of that asset by simple supply and demand.

Bitcoin Controversy

The controversy around Bitcoin came in 2016 and 2017 as financial firms identified a growing bubble in Bitcoin’s rising value. The value of Bitcoin is determined by the value of the goods that people are willing to trade for it. In turn, the amount of coins on the market and the velocity and size at which transactions occur allow the network to track its total market capitalization relative to international fiat currencies. In any case, the growing value of cryptocurrencies and the dearth of legal inclusion of Bitcoin in the international trading arena gave banks and governments the chills. 

In the international political arena, various governments were forced to make quick decisions on the legality of Bitcoin. In some countries like Japan and Taiwan, Bitcoin has gained ground and is today recognized as an independent, and therefore non-taxable, currency. Other countries have made the exchange of Bitcoin outright illegal, while others have tried to make compromises. One such country, known in its own right as the ‘nation built on compromises,’ has determined that Bitcoin should be legally bought, sold and traded as an asset subject to capital gains taxes, and will thus be seen as a taxable piece of property. This country is the United States of America, where the majority of cryptocurrencies and blockchains are created and traded today. 

As Bitcoin saw a large dip at the beginning of 2018, skeptics were quick to assert the claim that Bitcoin was a bubble about to burst. Some governments stood their ground in the midst of the controversy, while some were still juggling with the concept itself and the legality surrounding the buying and selling of the coin. Bitcoin and its adoption continues to be one of the most influential and fascinating topics in technology, economics, and computer science. 

Bitcoin Legacy

The primary breakthrough that Bitcoin had in the technological world was its application of the first blockchain. Any network that requires transactions of any kind requires security and accountability, and the creation of an immutable, digital, public ledger opens up several possibilities for the world economy going forward. When the Ethereum blockchain was proposed in 2013, the use of blockchain technology was expanded to include the use of smart contracts, self-executing agreements that made blockchain technology even more customizable.  

At Ethos, we hold Bitcoin in high esteem as an innovation that inspired our own Ethos Bedrock system. Bitcoin continues to be the most traded cryptocurrency and will be able to be held alongside 100+ different coins & tokens with our upcoming Ethos Vault. As a final note and reminder, we encourage our readers and users to perform adequate research on Ethos’ or other platforms before making important financial decisions.

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